Wednesday, March 11, 2015

Should Student Loan Debt be Forgivable?

Playing the devil’s advocate is never an easy thing to do, but it’s an important thing to do when you start talking about some of the more serious issues facing humanity. One such issue, albeit not quite as life-shaking as some other things, is the question of whether or not student loan debt should be forgivable in the same way that other debts can be absolved.

The problem goes back to the unparalleled high spirits of the 1990s and 2000s. In the burgeoning internet world, it became clear that everyone who had even a modest knowledge of computing had the opportunity to cash in on the tech boom. You just had to make sure that you were one of the first in line to come up with the next big thing. After that, there was still plenty of room for tech workers, so high school students raised on Playstation and Nintendo figured out how to code, went to college, and found six-figure jobs building the world that we know of now as the “internet.” It’s come a long, long way since the mid-1990s, when everyone started getting online.

It’s unfortunate that it had to come to an end, but when it did, nothing died easily. Hundreds of thousands of fresh-faced college grads were out of work, and if they couldn’t hack it building up their own businesses online, then they ended up like many before them, neck-deep in student loan debt with no job to speak of, and few prospects to pay back the loans they took out. Then, the problem spread out across industries, leaving millions of unemployed in its wake. The student loan debt tide reached epic proportions.

This has, in recent years, sparked an interest in loan forgiveness. Usually, loan debt that cannot be repaid has to be absolved by bankruptcy, wherein you agree to terms of repayment, or ask the court for protection from your creditors. With student loans, the process is a bit different. Most student loans today are secured by the federal government. This gives a two-fold benefit. Since there’s less risk to investors, it’s considered a safe investment to make, meaning that creditors more easily offer student loans to kids who might otherwise not have any credit history to speak of, have no assets, and might be otherwise considered a bad risk, and as such, would only qualify for the absolute highest interest rates available. Since the federal government backs federal student loans, however, they become a good risk, and thus drive down the prevailing interest rates, which are then passed on to the students themselves.

Interesting, huh? The issue, though, is that if you were to take away that lack of risk, which is what would happen if it were easier for students to default on loans and be forgiven of them, then the greater risk would drive up the prevailing interest rate accordingly. Can you imagine paying a 20% or higher interest rate on a $25,000 student loan? Play with the calculations with a calculator, and it’ll make you sick to your stomach. Think along the lines of a total of $79,000 in loan payments, $54,000 in interest paid, and 15 years of payments in the $450 per month range. Any way you cut it, it isn’t pretty.

Maybe it should be a little easier for student debt to be discharged. As it stands, you have to prove a major hardship on your life, and even then, bankruptcy courts are going to do everything they possibly can to get the federal government its money. To be fair, you’re the one who asked for the loan. What you do with it is your own business. That means you should do everything you possibly can to avoid squandering your education. Don’t waste your time in school taking redundant classes, and avoid more than anything going in without a plan. Even if it means taking time off from school to figure out what you want to do. Waste not, and you won’t end up paying on student loans for the rest of your life.

Should student loan debt be forgivable? It depends on who you ask, but for the most part, the best answer is “no,” it shouldn’t be. To do so might well put an end to the institution of college finance all together, in which case the most likely outcome would be that only the very rich would actually be able to afford to go to college at all.

1 comment:

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